Since June, the FTSE 250 has declined by 18%. This means that it is almost in bear market territory, with a fall of 20% from a previous high being the technical definition of a bear market.
It would be unsurprising if the index fell by a further 2% to take it to a level which is 20% down on its all-time high. With the majority of the index’s sales and profitability being generated in the UK, investors may become increasingly cautious about the outlook for the economy and the index. However, recent falls, and any further declines, could represent a substantial buying opportunity for long-term investors in my opinion.
Clearly, Brexit is weighing on investor minds at the present time. This is perhaps to be expected, since leaving the EU represents a major political and, potentially, economic change. There could be some disruption in the near term, and a number of industries may find that previous processes become redundant or need to change. Furthermore, with politicians set to continue arguing about the best way forward, the short-term prospects for the FTSE 250 may be somewhat challenging.
Investors, though, appear to have factored in a significant amount of disruption for the UK economy. The index now yields over 3%, which is historically high and indicates that it offers a margin of safety. Although a lower price level could be achieved in the first half of 2019, in the long run buying at the current price of around 17,400 points could provide investors with a foundation for future capital growth.
A glance at the FTSE 250’s chart over the last 20 years provides evidence that the index has always recovered from downturns. Even when it plunged following the dotcom bubble and the financial crisis, the index recovered to post higher highs. As such, its long-term prospects appear to be bright, with an annualised total return of over 9% having been recorded since the end of 1998.
Although the impact of Brexit is impossible to accurately quantify due to its unprecedented nature, the reality is that during the last two decades the index has experienced, and fully recovered from, two major ‘busts’ which caused investor sentiment to plummet to exceptionally low levels. While the same thing could happen in 2019 due to Brexit, for long-term investors there could be a buying opportunity today, as well as in the coming months if the index moves lower.
As ever, buying any asset during a period where its price is declining may be tough. But doing so could allow an investor to maximise their total returns in the long run through buying low and selling high. While risky in the short run, in the long run the return potential of the FTSE 250 seems to be high after what has been a challenging six-month period.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.